When Molly first launched her catering business, she offered deep discounts to family, friends, referrals and pretty much anyone else. Tom took the same approach when he started his graphic design business; he charged nearly 50% the going rate in order to lock in his first crop of clients.

Eager to attract clients and customers, many new businesses undercut their prices. And all too often, these companies face a similar fate: Their business grows, their customers are more than satisfied, more customers come in, and these businesses are busier than ever. Everything looks to be a success — except the bottom line. It’s an unsustainable operation, in which entrepreneurs are running as fast as they can, yet they’re still barely bringing in enough money to stay afloat.

Welcome to the pricing trap. If you feel like your business is treading water even as sales volume picks up steam, it’s time to revisit one of the four "P’s" of marketing: your price.

Raise Your Confidence, Raise Your Rates

Typically, a lack of confidence is at the root of underpricing products or services. Many new businesses charge the least amount possible, out of fear that clients won’t pay more. Then, they worry what will happen if they ask to raise their prices. Of course, this approach leaves you with long hours, not enough income and clients who don’t value your services.

At the most basic level, your business is all about earning the money you deserve for the value you bring to customers. By undercharging clients, you send the message that your services and talents are worth less than your contemporaries. You undermine the unique value you bring to the table and open the door to resentment down the road. And you end up attracting clients who are pure bargain shoppers, the ones who are looking to get a lot for a little. (It's sort of like the argument against Groupons for small business.)

When Higher Prices are Better for Your Clients

Are you afraid that charging more money will mean you’ll be working longer hours? This is a common concern among new entrepreneurs, yet the reality is actually the opposite.

When your pricing is set too low, you need to take on more clients and clock more hours (or sell more products) to stay in business. What’s the result? You’re time-pressed, overworked and frazzled. You’re no longer able to give each client the close attention you once did; rather, it feels like a nonstop race to bring in new customers.

If you’re good at what you do (which you are) and are confident in the value you provide to clients (which you should be), then you should have no problem raising your prices. You’ll end up being able to spend more time with each client — thus delivering even greater value.

There’s another advantageous offshoot from raising your prices: You end up working with people who understand the value of investing in higher priced, higher value solutions. In short, your pricing strategy can help you attract the right kind of customers.

Pricing Sets the Perceived Value

By undervaluing your products or services, you’re instantly lowering the perceived value. A jewelry artisan relayed her experience the first time she sold her products at a higher end craft fair. As a budding designer, she was just starting out and less than savvy when it came to pricing and her marketplace.

One customer looked to buy a pair of pearl earrings and mistook the $25 price tag for $75. The designer explains, “When I corrected her, I assumed she’d be ecstatic; after all she was getting the earrings for $50 less. What I saw instead was a glimmer of disappointment. Here they were, the exact same earrings. But at $25, they suddenly seemed less desirable.”

Consumers buy based on perceived value. You can actually empower your business and products by raising your prices.

One Small Business Example

My husband and I launched a legal document filing company in 2009. At that time, it was an already saturated industry with thousands of competitors (and some pretty large names, too). In fact, the entire industry was commoditized and with commodities, so the lowest price wins, right? In a rush to attract and acquire customers, we positioned our product as low price/high volume.

We soon found ourselves losing money with each order we’d receive. Since we weren’t looking to trick any customers into upselling services they didn’t need, we needed a different strategy to fix our bottom line. We switched our mindset from selling a commoditized product to selling a service. And in doing so, we increased our prices, by 20% for some services, up to 100% for others.

Naturally, we were nervous about the impact … how much business would we lose with our new prices? We were shocked by the result. Our sales volume increased by 9% the first month, then 22% the following month.

The moral of the story? There wasn’t enough room for us to compete in a commoditized industry, but we could easily differentiate our services by illustrating the unique value we bring to the table. By competing on performance instead of purely price, we could frame the customer’s decision in terms of our company’s strengths.

Communicate Your Value

Whether you are announcing your prices to the market for the first time or changing your pricing structure, it’s important that you communicate exactly what you offer and every single benefit you deliver. Identify where you do a superior job of meeting your customer’s needs and then communicate this extra value to the customer. This is where your marketing language becomes essential.

As long as you deliver something that is superior to the competition and other alternatives in a meaningful way, you’ll be able to raise your prices, avoid the pricing trap, be compensated fairly and create a robust business for the long haul.

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